Roth IRAs offer significant estate planning and financial benefits. If you have a substantial balance in a traditional IRA and are considering converting it to a Roth IRA, there may be no better time than now. The Tax Cuts and Jobs Act (TCJA) reduced individual income tax rates through 2025. By making the conversion now, the TCJA enhances the benefits of a Roth IRA.
Estate Planning Benefits
The main difference between traditional and Roth IRAs is the timing of income taxes. With a traditional IRA, your eligible contributions are deductible on your tax returns but distributions of both contributions and earnings are taxable when you receive them. With a Roth IRA, on the other hand, your contributions are nondeductible — that is, they’re made with after-tax dollars — but qualified distributions of both contributions and earnings are tax-free if you meet certain requirements. As a general rule, from a tax perspective, you’re better off with a Roth IRA if you expect your tax rate to be higher when it comes time to withdraw the funds. That’s because you pay the tax up front, when your tax rate is lower.
From an estate planning perspective, Roth IRAs have two distinct advantages. First, unlike a traditional IRA, a Roth IRA doesn’t mandate required minimum distributions (RMDs) beginning at age 70½. If your other assets are sufficient to meet your living expenses, you can allow the funds in a Roth IRA to continue growing tax-free for the rest of your life, multiplying the amount available for your loved ones. Second, after your death, your children or other beneficiaries can withdraw funds from a Roth IRA tax-free. In contrast, an inherited traditional IRA comes with a sizable income tax bill. As a word of caution, you’ll need to factor in proposed legislation in The Secure Act (See my blog of June 17, 2019) which, among other changes, would require IRA distributions to take place over a 10-year period — making the benefit less attractive.
The TCJA’s tax changes may make it an ideal time for a Roth IRA conversion. You’ll have to pay federal taxes when you convert from a traditional IRA to a Roth (and possibly state taxes too). But as previously discussed, Roth IRAs offer tax advantages if you expect your tax rate to be higher in the future.
By temporarily lowering individual income tax rates, the TCJA ensures that your tax rate will increase in 2026 (unless a future Congress lowers tax rates). Future tax rates are irrelevant, of course, if you plan to hold the funds for life and leave them to your loved ones. In that case, you’re generally better off with a Roth IRA, which avoids RMDs and allows the full balance to continue growing tax-free.
Proceed With Caution
If you’re contemplating a Roth IRA conversion, discuss with us the costs, benefits and potential risks. It’s important to be cautious because, once you convert a traditional IRA to a Roth IRA, you’re stuck with it under current law. The TCJA repealed a provision that previously made it possible to “undo” a Roth IRA conversion that turned out to be a mistake.
If you have a substantial balance in a traditional IRA and are considering converting it to a Roth IRA, consider doing so now. Why? You have to pay taxes on the conversion and the Tax Cuts and Jobs Act (TCJA) reduced income tax rates through 2025. Roth IRAs offer tax advantages if you expect your future tax rate to be higher. By temporarily lowering individual income tax rates, the TCJA ensures that your rate will increase in 2026 (unless a future Congress lowers tax rates). From an estate planning perspective, a Roth IRA has two advantages: 1) It doesn’t mandate required minimum distributions (RMDs) beginning at age 70½, and 2) your beneficiaries can withdraw funds from a Roth IRA tax-free.
With so much to consider, it is important to discuss a potential Roth conversion with your professional advisors. You can reach me at SDitman@BerdonLLP.com or contact to your Berdon advisor.
Scott T. Ditman, a tax partner and Chair, Personal Wealth Services at Berdon LLP, advises high net worth individuals and family/owner-managed business clients on building, preserving, and transferring wealth, estate and income tax issues, and succession and financial planning.